Displaced capital and Japanese economic growth

Implicit in many theories of Japan's macroeconomic malaise is the displacem ent of financial capital. It underpins the widely held view that physical i nvestment has been retarded by the disruptive effects of nonperforming loan s on financial intermediation. This paper recognizes that the displacement of capital also has real dimensions. It develops the View that the reemploy ment of displaced capital can compromise growth, perhaps to the point of pe rpetuating a recession. This may help to explain Japan's prolonged period o f stagnation. J. Japan. Int. Econ., June 2000, 14(2), pp. 105-120. Reserve Bank of Australia, 65 Martin Place, Sydney NSW 2000, Australia; and Goldman Sachs Asia, 68th Floor, Cheung Kong Centre, 2 Queen's Road, Central, Hong Kong, China. (C) 2000 Academic Press Journal of Economic Literature Classif ication Numbers: E22, O16.